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FSA consults on changes to levels of compensation for insurers

In this month’s consultation paper (CP 08/15: Financial Services Compensation Scheme: Review of Limits) the FSA has put forward its proposals to update the Financial Services Compensation Scheme. As part of a programme of work by the tripartite authorities (the Bank of England, HM treasury and the FSA) several papers have been released which consult on how best to provide depositors with compensation in the event that a financial services firm is unable to pay any claims against it.

The Financial Services Compensation Scheme (FSCS) was established in 2001 as the statutory compensation fund for the customers of firms authorised by the Financial Services Authority (the FSA). In the light of current market conditions the FSA has decided to review the compensation limits available for consumers. On 2 October the FSA Board agreed to increase the FSCS deposit compensation limit to £50,000 from the 7 October 2008. These changes were made within the procedure set out in section 155(7) of the Financial Services and Markets Act which allows the FSA to waive the need for industry consultation where it might be “prejudicial to the interests of consumers”.

The changes to the compensation limits for both life and general insurance products fall outside the above proposals for depositors and therefore the FSA has the opportunity to consult upon their suggested changes. The deadline for responses is the 5 January 2009.

Present compensation limits

At present the compensation limits are as follows:

Long-term insurance: under the FSA rules the FSCS must try to “achieve continuity” for at least 90 per cent of the benefits of such policies - either through a transfer or through a substitute policy being issued. Where this cannot be achieved the limit for compensation is 100 per cent for the first £2000 and 90 per cent of the remainder with no upper limit

General insurance: the limit is 100 per cent of the claim with no upper limit in respect of compulsory insurance. For non-compulsory insurance the limit is 100 per cent of the first £2000 and 90 per cent of the remainder with no upper limit.

Mediation of non-investment insurance: as for general insurance.

The proposals

In CP 08/15 the FSA proposes that the 100 per cent band applying to the first £2000 should be removed for all non-compulsory insurance, leading to a recovery of 90 per cent of the whole claim with no upper limit.

The FSA argues that the current limits are not easy for consumers to understand and might speed up compensation payments to consumers should an insurer be unable to meet its claims as there would be less administration where a consumer held several policies with one insurer.